Corley described 2017 as a year of transition as she shared her outlook on the economy, geopolitics, fiscal and monetary policy, and their implications for global investors. And while she characterized the environment as challenging and struck a cautious tone, she also offered hope and some words of advice for beleaguered active managers.

Corley sees generally “improving cyclical forces amidst a backdrop of structural challenges.” While labor markets are mixed worldwide, employment in the United States has been notably strong. There’s also evidence of reflation in the manufacturing and service sectors, driven by rising commodity prices.

And notwithstanding the US Federal Reserve’s intention to return to a more normal monetary policy, central banks around the world remain accommodative. But Corley’s narrative took a dark turn as she gave a sober assessment of some of the uncertainties and potential obstacles investors face.

Stock market volatility, best measured by the CBOE Volatility Index, remains at historically low levels, which may suggest an unhealthy level of complacency. The geopolitical climate is similarly concerning. Global conflicts, the ongoing threat of terrorism, the refugee crisis in Europe, and surging populist movements all represent significant headwinds for investors. So too does the overhang of sovereign debt and aging populations and declining productivity in the developed world.

Of course, uncertainty is nothing new for investors. And despite the rising popularity of passive investing, Corley sees opportunity in the current environment for active managers. In fact, she considers the trend toward passive investing a force for good in the financial industry, putting downward pressure on fees, which have been a persistent target of criticism for the industry. A 2016 study by Allianz found that three out of five institutional investors surveyed think active management offered superior net performance and better downside protection.

While recent results suggest otherwise, Corley does think active managers can add value when it comes to uncorrelated markets and responsible or environmental, social, and governance (ESG) investing, niches that are rapidly gaining greater market share. However, she warned that this surge may not be entirely genuine and that as many as four in ten ESG funds in the United Kingdom are socially responsible in name only.

What are investment managers to do in a world of geopolitical turmoil, economic uncertainty, and low returns? According to Corley, they should pay close attention to macro developments, include active investing as a key component of their strategy, and feature alternative assets and dividend-paying stocks in their portfolios.

And above all else, they should focus on understanding their clients’ needs and take measured risks to reach their objectives.

Mystery solved. Oftentimes the right answer is the most obvious one.

This article originally appeared on the 70th CFA Institute Annual Conference blog. Experience the conference online through theVirtual Link. It’s an insider’s perspective with archived videos of select sessions, exclusive speaker interviews, discussions of current topics, and updates on CFA Institute initiatives.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise:Equity Investments · Portfolio Management

1 thought on “Navigating the Markets in a Year of Transition”

I agree with Corley’s assessment that active managers can add value. Even though passive performance has recently outperformed, the growth of passive AUM seems like it risks creating a pool of “dumb” money which will give traders and active managers an opportunity to pick and choose stocks based on qualitative factors while ETFs lag behind.

Assets in US index-based equity mutual funds and exchange-traded funds exceeded assets in active stock funds for the first time in August, after years of growth for passive investment. The shift represents a milestone for the financial industry. Bloomberg (tiered subscription model) (11 Sep.)

Democratic candidates for US president were unified in a debate Thursday in criticism of President Donald Trump's erratic approach to negotiating a US-Chinese trade deal. Top contenders clashed over health care policy, with front-runner former Vice President Joe Biden attacking the high cost of other candidates' proposals. CNBC (13 Sep.)

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